An Alchemy member recently asked me to elaborate on business credit. I’ve used various forms of business credit over the years and there are 7 key categories to look at if you’re hoping to leverage your way up the growth ladder.
Let’s not forget about this one. The truth is if you're new to business or your entity is newly established, you will have to initially rely on personal credit. Many businesses have been built using personal credit, such as credit cards or home equity lines of credit. I suggest you aim to separate personal and business credit in the long run, though in the early years of your business, if you're using personal credit, you're not alone.
Business Credit Cards:
After about one year in business, you should be eligible for a business credit card in the name of your business using your business EIN number. The issuer will still consider your personal credit history to determine eligibility and credit limits. Even if your business credit card debt won't appear on your personal credit report (though sometimes it does), the issuer may conduct frequent soft pulls on your personal credit to monitor you overall. The interest rates for business credit cards are similar to personal credit cards.
Though not strictly business credit, having overdraft protection for your business checking account can help bridge financial gaps when needed. It functions similarly to personal overdraft features.
Bank Lines of Credit:
You can apply for a business line of credit with your local bank after three years of operation and tax returns. The approval process varies among banks and typically involves extensive underwriting. These lines often need to be renewed annually and are based on the prime interest rate plus 1-3%.
Equipment Financing or Revenue-Based Short-Term Loans:
If you require quick credit or cash, these options provide fast access but come with higher costs. Creditors often analyze the last three months of your bank statements to determine eligibility. The loan usually incurs about 30% of the total loan amount in fees and must be repaid through weekly or monthly installments within 12-18 months. Expensive, but sometimes necessary.
As your business grows and generates over $5M in annual revenue, it becomes more feasible to attract investors willing to provide loans or take equity positions in your company in exchange for cash. The terms will vary depending on market conditions, type, and size of the business.
Trade Credit Lines:
If your business involves substantial purchasing, your vendors may offer a short-term credit line (usually 30-90 days) based on your relationship with them. The credit line is usually complimentary as long as you pay your bill within the time allotted.
Keep in mind that credit access for businesses follows macroeconomic conditions. During credit-tightening periods like the cycle we are in now, it can be more challenging to obtain and keep credit limits.
It's essential to explore and maintain your credit options and it’s best to do it when you don’t need it because when you do, it can be very difficult to get.